On June 3, the U.S. Department of Justice Civil Division's Washington, D.C., office filed a statement of interest[1] in a relator's action, arguing that "[c]onduct giving rise to a regulatory violation can also give rise to" False Claims Act liability.[2]

The case is U.S. ex rel. Patricia Crocano v. Trividia Health Inc., before the U.S. District Court for the Southern District of Florida.

Specifically, the DOJ requested "that the ruling not foreclose the possibility that, under certain circumstances," conduct that violates the Federal Food, Drug and Cosmetic Act or U.S. Food and Drug Administration regulations "could be material to the government's payment decisions and provide a basis for FCA liability assuming all necessary FCA elements are demonstrated,"[3] colloquially known as "fraud on the FDA."

This filing makes clear the DOJ's decision to reawaken a theory of liability thought to be dead.

First rejected by the U.S. Court of Appeals for the First Circuit in 2016, the U.S. Court of Appeals for the Ninth Circuit gave the theory a second chance, resulting in a circuit split on this issue.

Fraud on the FDA

The fraud-on-the-FDA theory stems from the well-established legal doctrine of fraudulent inducement. Fraudulent inducement under the FCA occurs when a company's fraudulent conduct induces the government to enter into a contract with the company, making any claims for payment under the contract false.

Under the theory, fraudulent inducement occurs when a company's violations of the FDCA or FDA regulations materially and wrongfully induce the FDA to approve a product, device, etc., which in turn causes payments made by the Centers for Medicare and Medicaid Services in relation to those products.

This theory inherently suggests that false claims arise whether that agency paid for the claims at issue or not.

Circuit Split

First Circuit Decision

In 2016, the First Circuit decided in U.S. ex rel. D'Agostino v. Ev3 Inc.[4] that a relator's fraud-on-the-FDA claim could not move forward because no causal link existed between the defendant's alleged false statements to the FDA and the later CMS payment of the claims.

The court reasoned that if the FDA was not, in fact, defrauded, Ev3 — which submitted the data to the FDA — could not have caused the submission of false claims to CMS as a matter of law. The FDA would have to withdraw its approval or take another official action to confirm that it was, in fact, defrauded.

Without such confirmation, a relator could not base an FCA claim on the theory that FDA approval was fraudulently obtained.

The court noted that the FDA does not itself pay claims for medical products. Rather, such claims are paid by CMS, generally on the condition that the FDA had approved or cleared them for marketing.

Ninth Circuit Decisions

In contrast, the Ninth Circuit has allowed claims based on the fraud-on-the-FDA theory to continue in two instances.

In 2017, in U.S. ex rel. Campie v. Gilead Sciences Inc.,[5] the court found that "[m]ere FDA approval cannot preclude False Claims Act liability, especially where, as here, the alleged false claims procured certain approvals in the first instance."

Reasoning that while "other courts have cautioned against allowing claims under the False Claim Act to wade into the FDA's regulatory regime … it is not the purpose of the [FCA] to ensure regulatory compliance," nor is it the "FDA's purpose to prevent fraud on the government."

In 2021, the Ninth Circuit revisited Campie and found in U.S. ex rel. Dan Abrams Company LLC v. Medtronic Inc.[6] that a claim under the FCA could be sustained when a medical device was allegedly not properly cleared by the FDA for any proper use.

For example, in Medtronic, some medical devices only worked for their off-label or contraindicated use and not for the labeled intended use. The court reasoned that this alleged fraud went "'to the very essence of the bargain.'"

It distinguished this situation from medical devices that could be used for their stated intended use and the contraindicated use, finding that the alleged omission of the company's intention to market the devices for a contraindicated use was immaterial to the FDA's clearance of the device.

The Current Case: U.S. ex rel. v. Trividia Health

The DOJ's statement of interest in Trividia Health expresses the United States' "substantial interest in the development of the law in this area and in the correct application of that law in this, and similar cases."

It also intends for the statement of interest to clarify its position on certain legal arguments in the motion to dismiss at issue. In sum, it argues:

• FDCA violations are relevant to FCA cases because, in certain circumstances, these violations may be material to the government's decision to pay for the product.
• These violations may be relevant in FCA cases when they are "significant, substantial, and give rise to actual discrepancies in the composition, functioning, safety, or efficacy of the affected product."
• A regulatory violation is relevant, for example, when the product's quality, safety and efficacy falls below FDA specified levels but is still cleared through its approval process.[7]
• Manufacturing deficiencies are relevant when they "affect the quality, safety, and efficacy of the affected products" to the extent that the products would have never been approved or cleared by the FDA in the first instance nor would the FDA have allowed for the product to remain on the market if it was aware of the truth. Therefore, the claims involving those devices would be an FCA violation because the product never would have been eligible for federal health care program reimbursement without the false claims.
• Examples of relevant manufacturing deficiencies include when a medical device manufacturer obtains FDA approval or clearance for a device and "'then palm[s] off a defective version of that device both directly on the government itself and on the unsuspecting government payors.'"

On July 18, the court in Trividia dismissed the relator's amended complaint.

The Southern District of Florida found that the relator failed to state a claim under the FCA because "the [FCA] is not a catch-all statute for targeting weaselly behavior," and the relator's "allegations amount to a series of regulatory violations whose connection to claims for payment by the government is tenuous at best."[8]

Most notably, however, the court created a new delineation of this theory by explaining that there are situations where a regulatory violation could rise to liability under the FCA.

For example, "if a statute governing certain claims expressly conditions reimbursement on compliance with specific regulatory obligations," then there may be FCA liability because "the violation of said obligation is 'material' to the claims."[9]

It refused, however, to sanction the use of the FCA as a "sweeping mechanism to promote regulatory compliance."

This decision places the burden on legislators to decide how and when regulatory violations lead to FCA liability.

Practical Implications

The Trividia statement of interest is the DOJ's most recent and substantial attempt to sway the tide toward universal acceptance of the fraud-on-the FDA theory.

While it was not successful in this case, the DOJ includes reasoning substantially similar to that of the Ninth Circuit's in Medtronic when arguing that certain FDCA violations should lead to liability.

Therefore, with a circuit split between the First and Ninth Circuits, the acceptance of the fraud-on-the-FDA theory will be circuit-specific and unpredictable in matters of first impression.

That being said, most companies have medical products distributed and subsequently reimbursed within the Ninth Circuit.

By widening liability to the marketing clearance stage, all communications between companies and regulators will be open to scrutiny in FCA investigations.

Accordingly, there is an even greater importance in ensuring that these communications are thoughtfully crafted, heavily vetted and contain only accurate and up-to-date information.

Further, pharmaceutical companies and medical device manufactures must ensure that they comply with all FDA regulations and directives at every stage of the product's development.

They should also be prepared for an uptick of DOJ-driven and qui tam investigations and actions based on fraud-on-the-FDA FCA claims.

At this time, the DOJ is only focusing on products and devices that the FDA "never would have approved or cleared … if it had known the truth" of the violations.[10] This includes (1) completely defective products and (2) products approved by the FDA for one purpose, but only work for an off-label or contraindicated use.

This is the position adopted by the Ninth Circuit in Medtronic. However, the DOJ will likely attempt to expand this theory of liability. Therefore, all heavily regulated industries that fall under the umbrella of the FCA should monitor these develops and apply similar controls as those discussed above.

References

[1] United States' Statement of Interest As to Defendant's Motion to Dismiss, ECF No. 124, United States ex rel. v. Trividia Health Inc., No. 22-cv-60160-RAR (S.D.Fl. June 3, 2022) ("Statement of Interest").

[2] Id. at 2.

[3] Id. at 6.

[4] United States ex rel. D'Agostino v. ev3, Inc. , 845 F.3d 1 (1st Cir. 2016).

[5] United States ex rel. Campie v. Gilead Scis ., 862 F.3d 890 (9th Cir. 2017).

[6] Dan Abrams Co. LLC, et al. v. Medtronic Inc. , 850 F. App'x 508 (9th Cir. 2021).

[7] See 21 U.S.C. §§ 351(b), 351(c), 351(e), 360d, 360k.

[8] Order and Opinion at 16, ECF No. 127, United States ex rel. Crocano v. Trividia Health Inc. , No. 22-cv-60160-RAR (S.D.Fl. July 18, 2022) ("Opinion").

[9] Id.[10] Statement of Interest at 2.

Reprinted with permission of Law360.